CEO Optimism and Competitive Shocks
70 Pages Posted: 23 Aug 2018 Last revised: 22 Jul 2022
Date Written: July 21, 2022
We examine differences in how overoptimistic and non-overoptimistic CEOs respond and perform when faced with competitive shocks. Using tariff reductions as exogenous shocks to competition and triple difference specifications on matched samples, we find that when competition increases, firms with overoptimistic CEOs slash their profit margins and increase research and development and advertising more than non-overoptimistic CEOs do. Our novel finding is that CEO overoptimism benefits these firms, here through increased domestic market share and increased value relative to firms led by non-overoptimistic CEOs. Our empirical results support extant theories that predict that CEO overoptimism is beneficial under increased competition.
Keywords: CEO overconfidence, competition, tariffs, firm value, market share
JEL Classification: D22, L11, G31, F14, M12
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